Focus on Not-For-Profits: New IRS Proposed Regulations Could Affect Charitable Contribution Deductions and State Tax Credits

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The Internal Revenue Service (IRS) issued proposed regulations on August
23, 2018 that could affect charitable contribution deductions that
individual taxpayers are able to claim as itemized deductions for income
tax purposes.

August 30, 2018

The Internal Revenue Service (IRS) issued proposed regulations on August 23, 2018 that could affect charitable contribution deductions that individual taxpayers are able to claim as itemized deductions for income tax purposes.

Enacted in December 2017, the Tax Cuts and Jobs Act limited the deduction for state and local taxes, including income and property taxes, to $10,000 ($5,000 for married filing separately). This change resulted in a movement by certain states to circumvent the state income tax deduction limitation by setting up state-controlled charities to accept contributions from residents and to issue state income tax credits to those donors.

The new regulations affect the value of contributions to the new state-controlled charities and to pre-existing state programs that allow state credits for donations to certain charities. Effective for all donations made subsequent to August 27, 2018, the regulations would treat state tax credits issued related to these contributions as “quid pro quo” contributions, i.e. the donor received value (the state tax credit) in return for making the donation.

For example, assume a donor contributes $10,000 to a qualifying charity and receives a $4,000 state tax credit for the donation. Previously, the donor would have been able to claim the entire $10,000 charitable contribution as an itemized deduction on his or her federal income tax return. Additionally, the donor could claim a $4,000 credit on his or her state income tax return. Under the proposed regulations, the donor would only be able to deduct $6,000 (or $10,000 less $4,000) as a charitable contribution, but would still be entitled to the $4,000 state income tax credit.

For state tax credits issued that total less than 15% of the contributed amount, the proposed regulations would consider the credit received to be a “de minimis” benefit and the taxpayer’s deduction would not be reduced by the amount of the credit received.

A public hearing on the proposed regulations is scheduled in Washington, D.C. on November 5, 2018. The IRS is currently accepting comments on the proposed regulations.

RubinBrown is closely monitoring the developments of these controversial proposed regulations. If you have questions please contact one of RubinBrown’s Not-for-Profit Services Group professionals.

Readers should not act upon information presented without individual professional consultation.

Any federal tax advice contained in this communication (including any attachments): (i) is intended for your use only; (ii) is based on the accuracy and completeness of the facts you have provided us; and (iii) may not be relied upon to avoid penalties.